Monday, June 02, 2008

The Trouble with Venture Lawyers


Jason Mendleson over at Foundry Partners (he's the guy on the far right) has an excellent post up on his frustration with venture lawyers.

His analysis is better given that, before he became a VC, he was a lawyer.

His two primary points are cost and execution.

The first point on cost resonated strongly. He compared the average VC deal in 1998 to 2008 and concluded that the amount of the deal had gone up about 11%. The salary of a starting venture lawyer, during that same time, went up 114%.

We've felt the pain. Before we call, or even email, our lawyer, we ask ourselves long and hard: do we really need this? The minimum billing for a startup lawyer is 1/6th of an hour. 10 minutes. At the low end, that's $50.

Fifty bucks to send an email asking them to change something on our yearly Delaware filing paperwork. Minimum. More likely $150. They have to read the email (10 min charge- 1 minute of reading time), go do something else, come back and make the changes to the document (10 min charge... 2 minutes of work), go do something else, then come back and put the paperwork in an envelop (10 minutes charge- 1 minute of work).

$150.00

God help you if you want an actual contract reviewed, which comes to the second point re: execution.

We had a large contract with a big company that our then CEO 'ran by the lawyers'. $25,000.00 later, we had a passable contract. Chances are it would have been more if our CEO at the time hadn't left the company. To this day I'm not clear how we spent that much money on a simple contract with pretty clear terms to start with.

Even at $500 an hour, that's 50 hours. I'm wondering if that's really possible. Does it really take 50 billable hours of a partners time to 'review' a contract?

There's definitely an execution problem there. I have no idea if it was on our side or the law firms, but at $500 an hour, it's pretty easy to lay at least part of the blame on the law firms doorstep.

So, I couldn't agree more with Jason's take on venture lawyers.

I do know this: If I wasn't paying $500 an hour for the advice, I'd ask for alot more of it, and I'd count the lawyer as more of a partner in my business than a hideously expensive last resort 'check' to keep us from getting nuked when dealing with a big company or a litigious partner.

It's a little like health insurance costs: You skip getting the health insurance because it's just too damned expensive and pray you don't get sick.

2 comments:

Saul said...

As was noted in the comments to Jason's blog, small firms offer significant savings. There is surely alot of good talent available at small firms (even in NY) at substantially less than $500 an hour.

And outsourcing is already “here”. Here in Israel, there are a number of US expatriate lawyers, educated and trained in the US, serving US startups. (Disclosure: I am one of them.) Israel has a thriving startup market and Israeli legal fees are higher than those in India. Still, the savings for US startups can be dramatic. And it is not unusual for a US startup to enjoy a consigliere relationship with its US counsel located in Israel.

Jim said...

I have learned the hard way on both sides. Hired a cheap lawyer and got bad advice. Hired an expensive lawyer paid $15k to write a contract for a $100k deal.

After years of going through lawyers like maids at my house, I have one that is middle of the road and understands my business and sends us templates for a nominal fee, or tells us if something will be expensive.

Still, I am always careful before raising an issue to an attorney. Always seems like lighting money on fire.